Social Media as a Tool to Identify and Evaluate Credit Risk:  The Technology, Recent Advances and Legal Considerations for the Credit Team Carl Stronach Carl.Stronach@experian.com Craig Combs craig.combs@kyrcredit.com Virginia Soderman, CCE V. Soderman Consulting LLC virginias405@gmail.com Scott Blakeley, Esq. seb@blakeleyllp.com

Customer Use of Social Media as a Tool V. Soderman Consulting LLC Customer Use of Social Media as a Tool 75% of companies have a dedicated Social Media team 56% of executives say digital engagement with customers is a top 10 priority 71% of executives concerns about potential risks with Social Media but believe they can be mitigated Given the proliferation of Social Media activity, is there an opportunity to “plug in” and use the data?

Why is Customer Use of Social Media Important? V. Soderman Consulting LLC Why is Customer Use of Social Media Important? Given the number of businesses that use Social Media, is it likely that businesses today will thrive without using it? As each generation creates more purchasing power, it is up to business to reach them in a way that stimulates a connection or a response. There is much discussion in the financial news regarding the “re-tooling” of retail. Is it logical to think it only applies to retail?

Use of Social Media by Credit Organizations V. Soderman Consulting LLC Use of Social Media by Credit Organizations

Credit Today Survey Findings V. Soderman Consulting LLC Credit Today Survey Findings 42% use LinkedIn to gather credit information 27% use Facebook to gather credit information 12% use Google to gather credit information 5% use Yelp to gather credit information 3% use Twitter to gather credit information 11% use other SM sites to gather credit information Other Findings: Helps when there is limited information Additional verification

V. Soderman Consulting LLC Are you missing valuable information by not incorporating Social Media into your evaluations? If business needs to change to attract customers, doesn’t your method of evaluation need to change as well? SM activity can provide great insight into your customers ability to survive versus thrive. To follow are examples of the data that could be valuable to a credit evaluation.

Businesses Use Facebook to… Find and Connect with their Customers V. Soderman Consulting LLC Businesses Use Facebook to… Find and Connect with their Customers Posts / Shares / Links Events / Groups Offers / Promotions / Ads Supplier’s Use to Evaluate and Monitor Credit Risk Show business presence and brand perception by: Volume of activity and current postings Numbers of “Likes” Number of followers Research of negative comments Businesses use Yelp to… Create buzz by getting positive reviews Get reviewed / respond to reviews directly Offers / promotions Post photos and other info about their business and services Host social events for reviewers Supplier’s Use to Evaluate and Monitor Credit Risk Utilize reviews for indications of business acceptance and market penetration Sheer volume of reviews either favorable or negative can provide early indications of change in circumstances

Supplier’s Use to Evaluate and Monitor Credit Risk V. Soderman Consulting LLC Businesses Use Twitter to… Simplest of all social media platforms Messages are now up to 280 characters (doubled) and feature more rich image/video content Supplier’s Use to Evaluate and Monitor Credit Risk Does business have a large following? Is there frequent activity? Is the general tone positive or negative? Has the number of followers increased or decreased dramatically? Businesses Use LinkedIn to… Meet customers Get in touch with vendors Recruit new employees Latest in business or industry news Connecting with prospective clients Profiles are basically virtual resume Supplier’s Use to Evaluate and Monitor Credit Risk Typically a professional’s “Best Foot Forward” Goals and objectives are openly published Much Comment Activity can be monitored for actionable data Connections can be evaluated to assess overall market situation

VALIDATE, VALIDATE, VALIDATE!!!! V. Soderman Consulting LLC A WORD OF CAUTION……. VALIDATE, VALIDATE, VALIDATE!!!! As anyone who has ever dated online will tell you, what you see is not always what you get. Consider a “filtering” process to understand and validate what is being found.

V. Soderman Consulting LLC What About Fake News? The abundance of information on Social Media has confused people as much as it’s enlightened them Fake news is seen as a problem and is nothing new however is delivered faster through Social Media Always verify the source and content Don’t get most of your news from Social Media websites Tools: Factcheck.org, Snopes,Wayback Machine and FotoForensics just to name a few Remember “Think Before You Share”

How Can the Data be Obtained & Integrated? V. Soderman Consulting LLC How Can the Data be Obtained & Integrated? It would be very labor intensive to attempt to gather widespread activity data manually What options are available for commercial use of this data? No widespread presence to date How to develop resources?

Social Media Attributes for risk assessment Activity, trends, and sentiment Activity measures such as number of reviews, likes, check-ins Sentiment measures, score/rating/stars Trends in activity and sentiment relative to timeframe, e.g., one month, three months, six months, etc. Normalized based on industry and trading area accounting for different levels of social media use Social media descriptive attributes Detailed description of business category, more in depth than SIC Hours of operations, licensing, other

Social media attributes coverage rates Significantly higher availability of data on consumer facing businesses A social media grows each year, coverage rates are notably increasing. Logically, businesses that generate social media activity have higher “coverage” or availability of social media data, including: Restaurants, stores, entertainment with the highest coverage rates. Health and professional services (doctors, accountants, plumbers, etc.). Average coverage rate is 20%+, with range from 10% to 62%.

The Credit Team's use of SM at the New Account Stage V. Soderman Consulting LLC The Credit Team's use of SM at the New Account Stage Sites to consider Must supplier disclose to customer that SM used as a factor to approve B2B credit request? Must customer consent to SM use? May  supplier decline credit based on SM grounds?

The Credit Team's use of SM V. Soderman Consulting LLC The Credit Team's use of SM Internal considerations – IT access to SM sites for the Credit staff. How do you know what is a “best practice” in social media for the type of customer you are evaluating? Good opportunity to interface with Sales and Marketing to identify what is considered effective for the customer type. Determine a sense of “grading” Best Practice> Strong Practice> Adequate> Poor etc.

The Credit Team's use of SM V. Soderman Consulting LLC The Credit Team's use of SM As a credit professional what would you think if a company you were doing a review on did not have a Facebook page or not on Twitter? Could be “OK” given the type of business What if this is not the case? Not using social media as a vehicle to promote their product or service – why?

SM Laws Decision Tree B2C V. Soderman Consulting LLC SM Laws Decision Tree • Sites that may be early indictors of credit risk • May the supplier terminate the credit relationship based on SM information? • Should the supplier update its T&C’s to address SM use? • May industry group members share customer SM information with group members? B2C

SM and Customer Disparagement V. Soderman Consulting LLC SM and Customer Disparagement Defamation in the Internet age Generally, defamation is by either libel (false and unprivileged writing) or slander (false and unprivileged verbal statement) Anything written on social media can and will be used against the sender Harvard Business Case Study ex. Salesman posted negative comments about his company on Facebook Posts affected how business was perceived by customers and competitors No policy on social media posting

Summary and Observations V. Soderman Consulting LLC Summary and Observations Focus has been on validation of facts In addition to fact validation, the trend is to now look at and evaluate SM behaviors Much of the data relates to market share and success with target audience, which provides more detailed business facts, beyond an SIC code The degree to which SM is pertinent for the credit team depends on supplier's willingness to expand credit considerations Potential uses Provides rich potential for small and mid-sized business data Data associations: Is there a relationship between negative reviews on a business and that business’s ordering pattern with supplier or in the industry? Will payment patterns be impacted as a result?

Summary and Observations V. Soderman Consulting LLC Summary and Observations Potential uses (cont’d) “Big Data’s” role seems assured, due to the sheer massiveness of the data elements, worldwide geography and constantly refreshed input Silicon Valley analysts are testing full integration of data as an alternative to FICO Scores With leading edge data input, the SM factor will need to be integrated into the credit evaluation and credit scoring process…..preferably Is it the only factor utilized? Is it a component of the overall scoring process with many facets analyzed?